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Streamlining Ethics Enforcement

It’s time the profession sped up the ethics enforcement process and let the public see how it works.

BY LISA A. SNYDER

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EXECUTIVE SUMMARY

THE AICPA’S ETHICS
ENFORCEMENT PROCESS must be swift and
open to outsiders’ scrutiny if the profession
hopes to maintain public confidence.

IF A STATE BOARD OF
ACCOUNTANCY suspends, revokes,
withdraws or cancels a member’s certificate,
permit or license to practice public
accounting, the AICPA automatically suspends
or terminates his or her membership, as in the
current process. But if the state board
instead metes out any other disciplinary or
remedial sanction or penalty, the PEEC then
investigates the member. On average, that
takes roughly 18 months. The AICPA is
proposing that, in such cases, it
automatically discipline the member instead of
conducting another investigation.

WHENEVER A GOVERNMENT
AGENCY such as the SEC, or other
organization authorized to regulate
accountants, takes action to, for example,
publicly restrict or prohibit a member from
practice before it, the PEEC must conduct its
own investigation of the member. A new
proposal would have it automatically suspend
or terminate that individual’s membership.

UNDER CURRENT RULES,
members have the right to appeal the
automatic provisions of the bylaws but the
PEEC does not. The AICPA therefore is
proposing that the PEEC be permitted to appeal
to the joint trial board, asking that the
automatic provisions not become operative and
that instead the PEEC be given permission to
investigate the matter.

COMPLAINANTS CURRENTLY
ARE NOTIFIED of the end of an
investigation but not its disposition. The
AICPA is proposing that complainants be
informed of the results of its investigation,
including remedial or corrective action taken,
if any.

WHEN REPORTS OF
DISCIPLINARY MATTERS are published,
they reveal only the member’s name, city and
state of residence and a description of the
charges and terms of the settlement agreement.
The AICPA is proposing that the PEEC have the
flexibility to disclose additional information
about a matter investigated, subject to the
council’s review and approval.

LISA A. SNYDER, CPA, is
director of the AICPA professional ethics
division. Her e-mail address is
lsnyder@aicpa.org . Ms. Snyder is an
employee of the AICPA and her views, as
expressed in this article, do not necessarily
reflect the views of the Institute. Official
positions are determined through certain
specific committee procedures, due process and
deliberation.

n mid-2001, well before the media
focused on Enron and its independent auditors, the
Institute’s professional ethics executive committee
(PEEC) had established a task force to evaluate the
AICPA’s disciplinary process and develop
recommendations to improve it. This article explains
the latest developments in the PEEC’s latest
developments in the PEEC’s efforts, what they mean to
the profession and how individual practitioners can
support them in an upcoming member referendum.

In May and
October 2002, representatives of the PEEC
presented the AICPA council with several
proposals aimed at strengthening ethics
enforcement to help restore public and
regulator confidence in the profession. Based
on the council’s response, the PEEC
implemented a more transparent system, making
it easier for observers to determine what
sanctions, if any, the AICPA had imposed on a
member. For example, to make it simpler for
readers to trace an AICPA action to a publicly
reported matter, the PEEC will add—to notices
it publishes of disciplinary actions against
members—information that already is a matter
of public record, for example, the number of
the SEC’s accounting and auditing enforcement
release, where applicable. And from now on,
all members whose names are published in
The CPA Letter as a result of an
AICPA disciplinary action also will be named
in the national edition of The Wall Street
Journal on a periodic basis.

The PEEC implemented a more
transparent system of ethics
enforcement, making it easier for
observers to determine what
sanctions, if any, the AICPA had
imposed on a member.

ADMONISHMENT SANCTION At the council’s spring 2003 meeting, the PEEC
presented three more enforcement-related proposals.
Following extensive deliberation, the council approved
them. One proposal, which required approval by the
council only, is effective already. It enables the
PEEC to publicly admonish an AICPA member who has
violated the Code of Professional Conduct when other
sanctions—whether more restrictive (suspension of
membership) or less so (issuance of a private letter
of required corrective action)—are inappropriate.
Adoption of this proposal aligns the Institute’s
approach to discipline with that of other bodies,
including the joint trial board and state and federal
regulators. But the other two proposals, described
below, need approval from the membership before they
can be implemented. In late August or early September,
therefore, members will receive information and
ballots for use in a referendum on these issues.

AUTOMATIC SANCTION
This proposal would establish
an ethics enforcement policy allowing the PEEC
to automatically sanction without an
investigation an AICPA member who has been
disciplined by a government agency or other
organization authorized to regulate
accountants and approved and designated to do
so by the AICPA board of directors. Examples
are the Securities and Exchange Commission
(SEC) and the Public Company Accounting
Oversight Board (PCAOB). (Note that, as a
result of certain criminal or
income-tax-related violations or state board
of accountancy actions, the AICPA bylaws
already give the PEEC the ability to impose an
automatic sanction against a member without an
investigation or hearing.)

This proposal
would protect the CPA hallmark and members
in good standing by making the AICPA’s
enforcement process more timely while
ensuring that members under investigation
have an opportunity to present a defense.

Clearly the AICPA needs a mechanism to
discipline its members when warranted. But
the PEEC should be able to rely on the
disciplinary actions of state boards of
accountancy and certain board-approved
bodies without having to perform a full
investigation. Conducting an investigation
is a time-consuming process requiring
significant resources, and some ask why the
AICPA investigates matters already
considered by entities whose disciplinary
systems offer Institute members appropriate
due process. Moreover, the current system
often subjects members to multiple
investigations (for example, by the SEC,
state board of accountancy and the AICPA).
These issues are examined in greater detail
below.

What’s Up for Vote Automatic sanction.
State boards of
accountancy, government agencies and
other organizations routinely
discipline AICPA members. Under
current AICPA ethics enforcement
procedures, if the state board
suspends or revokes a member’s
license to practice, the AICPA
automatically suspends or expels the
member. But if the state board takes
any other disciplinary action or
another regulator acts against the
member, the PEEC then conducts an
investigation that lasts, on
average, 18 months. Following that
investigation, the AICPA may take
disciplinary action against the
member, if warranted. Meanwhile,
complainants wonder what’s taking so
long. The proposal on automatic
sanctioning would speed up the
process by triggering immediate
enforcement action corresponding to
that of agencies and organizations
authorized to regulate accountants.
This would improve public confidence
in the AICPA’s ability to swiftly
and effectively enforce its Code of
Professional Conduct.

Enhanced transparency.
When an ethics
enforcement procedure is finally
completed, complainants are
notified that the matter is
settled but not told how. The
proposal on transparency would
better publicize and explain the
process, strengthening the public
perception the AICPA is ready and
able to hold its members to the
highest professional standards.

State boards of accountancy.
Today, if a state board of accountancy
suspends, revokes or cancels a member’s certificate or
license to practice public accounting, the AICPA
automatically suspends or terminates the member’s
AICPA membership without an investigation. But if the
state board metes out any other disciplinary or
remedial sanction or penalty (for example,
censure/admonishment, monetary penalty or cease and
desist order), the PEEC must conduct its own
investigation and determine appropriate sanctions. The
proposal calls for automatically disciplining the
member by means of a sanction that is commensurate
with the state board action, thereby obviating any
additional investigation. The proposal requires the
PEEC to develop—and the AICPA board of directors to
approve—specific sanctioning guidelines for this
purpose.

Approved government agencies and other
organizations. Currently, whenever a
government agency, such as the SEC, publicly restricts
or prohibits a member from practice before it or
another government agency or from serving as an
officer, director or trustee of any entity, the PEEC
must conduct its own investigation. Under the
proposal, if the government agency sanctioning the
member has in place a disciplinary mechanism the PEEC
and board of directors have approved, the member would
not be subject to another investigation by the AICPA.
Instead, it would automatically discipline him or her
commensurately. For example, if the SEC suspended a
member from practicing before it for two years, the
AICPA would automatically suspend him or her for that
same period. If the agency meted out any other
disciplinary or remedial sanction or penalty, the
AICPA (that is, the PEEC) would automatically
discipline the member but would base its sanction on
an evaluation of publicly available information and
the specific guidelines the PEEC had developed and the
board of directors approved.

Under the
proposal, for automatic sanctions to apply, PEEC- and
board-approved organizations other than government
agencies would have to be authorized by law to
regulate accountants, as the PCAOB is. But the PCAOB
has not yet formally established its enforcement
policies and procedures. So, when they are in place,
the PEEC and the AICPA board will have to determine
whether they constitute an acceptable disciplinary
mechanism.

Member appeal process. As
is the case with the existing automatic
provisions of the bylaws, a member
automatically sanctioned under the new process
would have the right to appeal, as with all
disciplinary actions taken by the PEEC, to the
AICPA joint trial board, requesting that the
automatic discipline provisions of the bylaws
not become operative. If the trial board
grants the member’s request, the automatic
discipline against him or her would not take
effect, and the matter would be referred to
the PEEC for investigation. If the trial board
denies the member’s request, the automatic
discipline would take effect. Therefore
members have suitable protection and recourse
to appeal if they believe the action of the
disciplinary body, the state board or the PEEC
was unjust or unwarranted.

Recent PEEC Proposals to
Council

Proposal

Council vote

Admonishment
sanction

Approved;
member vote not necessary.

Automatic
sanction

Approved for
member vote.

Enhanced
transparency

Approved for
member vote.

PEEC appeal process. AICPA members
have always had the ability to appeal the application
of automatic disciplinary actions; the PEEC, however,
has not. Under the proposal, the PEEC also would have
the ability to request that the joint trial board
not impose an automatic sanction. For
example, in a case where an approved government agency
has suspended a member from practice before it, but
the PEEC believes—based on its review of the publicly
available information—either that the matter was
egregious enough to warrant expulsion from the AICPA
or alternatively that the agency’s sanction was too
harsh, it may appeal. If the joint trial board grants
the PEEC’s request, the automatic disciplinary action
against the member would not become operative and the
PEEC would conduct a full investigation of the matter.
If the request is denied, the automatic disciplinary
action would take effect.

Expected benefits. This
proposal would significantly improve the
effectiveness of the current ethics
enforcement process in a number of ways. It
would

Eliminate putting AICPA members
through the investigative process a
second—and sometimes third—time when the
AICPA believes the state board or an
approved disciplinary body has given the
member due process.

Protect members’ rights by
enabling them to appeal the matter in cases
where the state board’s or approved
disciplinary body’s action was unfair or
excessive.

Permit the PEEC to sanction
members in a more timely manner. The
disciplinary body would take action and make
it public immediately instead of waiting
until the PEEC’s investigative process is
complete—on average, 18 months later.

The proposal also would bolster AICPA
members’ confidence that they belong to an
organization that has the highest
professional standards and takes decisive
action against those not meeting them, and
it would enable AICPA staff and ethics
committee members to focus on other
investigations and ethics projects.

AICPA Web Site Focuses on
Proposals A new “spotlight” area on
the Institute’s Web site informs
members about the proposed ethics
enforcement enhancements members
will be asked to vote on later
this year (
www.aicpa.org/enforcement/
). It includes an overview of
the current AICPA ethics
enforcement process, a detailed
summary of the proposals, and
specific questions and answers.

ENHANCED TRANSPARENCY The
second proposal would establish a policy that allows
the PEEC—subject to the council’s review and
approval—to provide the public with more relevant and
useful disclosure about matters it has investigated.
The proposal also would allow the PEEC to disclose the
results of an investigation to an individual or body
filing a complaint with the Institute. All sanctions
currently imposed by the PEEC that result in
admonishment, suspension or expulsion are published in
The CPA Letter, on the AICPA Web site ( www.aicpa.org )
and—beginning fall 2003—periodically in The Wall
Street Journal. Currently, remedial actions
taken against AICPA members (for example, private
letters of required corrective action) and matters
that are closed with no finding or with a finding of
no violation are not published or disclosed except to
certain government agencies that had referred such
matters to the professional ethics division.
Individuals who filed complaints against AICPA members
found this nondisclosure policy frustrating. While
complainants were informed when an
investigation had concluded, they were not advised as
to how the matter was concluded. The proposal
before the membership would allow the PEEC to disclose
investigation results to people who filed formal
complaints with the AICPA. Those who choose to file
complaints should be able to find out the results of
the investigation.

Providing the public with
more relevant and useful information about ethics
investigations and disclosure of the results of an
investigation to a complainant are both in the public
interest and will help to enhance the credibility of
the enforcement process.

THE IMPORTANCE OF VOTING Over
the last year and a half the AICPA has made clear that
it won’t tolerate violations of the rules of
professional practice and that it wants to enhance the
quality of services members provide. The Institute
remains committed to these causes. Moreover, the
public counts on the profession’s integrity,
objectivity and competence, and it trusts that CPAs
will do the right thing. So, it’s essential the
disciplinary process promote professional conduct that
fulfills those expectations and gives the public the
confidence to rely on AICPA members. Because these
proposals are an important part of enhancing ethics
enforcement, it’s imperative that every member
understand them. Members’ support and favorable vote
will demonstrate their commitment to the profession’s
core values.

Proposal: Enforcement
policy concerning disciplinary actions of
state boards of accountancy and approved
governmental agencies and other
organizations.

Current process

Enhanced
process

Comments

State boards of accountancy.

Whenever a state
board of accountancy suspends,
revokes, withdraws or cancels a
member’s certificate, permit or
license to practice public
accounting as a disciplinary
measure, the AICPA automatically
suspends or terminates his or her
membership in accordance with
current bylaws.

State boards of accountancy.

Whenever a state
board of accountancy suspends,
revokes, withdraws, or cancels a
member’s certificate, permit or
license to practice public
accounting—or the member
surrenders such license—as a
disciplinary measure, the AICPA
automatically suspends or
terminates his or her AICPA
membership in accordance with
current bylaws. (same as current
process).

If a state board
instead metes out any other
disciplinary or remedial sanction or
penalty (for example,
censure/admonishment, monetary
penalty or cease and desist order),
the PEEC conducts an investigation
of the member.

If a state
board instead metes out any other
disciplinary or remedial sanction or
penalty (for example,
censure/admonishment, monetary
penalty or cease and desist order),
the member would be automatically
disciplined.

Requires
revision of AICPA bylaw 7.3.2 and
conforming changes to bylaw 7.4.5.
The sanction under the enhanced
process would be determined by the
professional ethics executive
committee (PEEC) based on its
evaluation of publicly available
information and specific sanctioning
guidelines developed by it and
approved by the AICPA board of
directors.

Governmental agencies and
other organizations.

Governmental agencies and
other organizations.

Whenever a governmental
agency, such as the SEC, or other
other organization that has the
authority to regulate accountants
publicly restricts or prohibits a
member from practice before it or
another governmental agency or from
serving as an officer, director, or
trustee of any entity, the PEEC
conducts an investigation of the
member.

Where the
governmental agency or other
organization that has the authority
to regulate accountants has been
approved by the PEEC and the board
of directors as having an acceptable
disciplinary mechanism in place, the
member would be automatically
suspended or terminated from the
AICPA.

If the governmental agency or
other organization that has the
authority to regulate accountants
instead metes out any other
disciplinary or remedial sanction or
penalty (for example,
censure/admonishment, monetary
penalty or cease and desist order),
the PEEC conducts an investigation
of the member.

If the
governmental agency or other
organization that has the authority
to regulate accountants instead
metes out any other disciplinary or
remedial sanction or penalty (for
example, censure/admonishment,
monetary penalty or cease and desist
order), the member would be
automatically disciplined.

The sanction under the enhanced
process would be determined by the
professional ethics executive
committee (PEEC) based on its
evaluation of publicly available
information and specific sanctioning
guidelines developed by the PEEC and
approved by the AICPA board of
directors.

The
AICPA member can appeal to the joint
trial board, asking that the
automatic disciplinary provisions of
the bylaws not become operative and
that the PEEC be allowed to conduct
a full investigation of the matter.

The AICPA member can appeal
to the joint trial board, asking
that the automatic disciplinary
provisions of the bylaws not become
operative and that the PEEC be
allowed to conduct a full
investigation of the matter (same as
current process).

The PEEC does not
have the ability to appeal the
automatic provisions of the bylaws.

The PEEC would have the
ability to appeal to the joint trial
board, asking that the automatic
disciplinary provisions of the
bylaws not become operative and that
the PEEC be allowed to conduct a
full investigation of the matter.

Would be used by the PEEC,
for example, in cases where the
disciplinary body suspends the
member but the PEEC believes the
nature of the misconduct was
egregious and should possibly result
in expulsion or in cases where the
disciplinary body permanently
restricts a member from practice but
the PEEC believes the sanction was
too severe. Requires revision of
AICPA bylaw 7.3.2 and conforming
changes to bylaw 7.4.5.

Proposal:
Enhanced Transparency of
Disciplinary Findings

Current process

Enhanced
process

Comments

The
complainant (where there is one) is
notified that an investigation has
been concluded but is not advised of
the PEEC’s decision. If the
investigation results in publishing
of a sanction (for example,
suspension or expulsion), the
complainant may be referred to the
published account of the matter on
the AICPA Web site. All other PEEC
decisions, including findings of no
violation, remain confidential.

The complainant would be
notified that the investigation has
been concluded and of the results of
the investigation, including
remedial action (such as required
CPE) or no violation.

Requires revision of AICPA bylaw
7.6.

The
published account of a disciplinary
matter includes the respondent’s
name, his or her city and state of
residency, description of the
charges and terms of the settlement
agreement.

The PEEC would
have the flexibility to disclose
more information about a matter
investigated, subject to the
council’s review and approval.